AOL Invests $1.5 Billion In Hughes

In a move viewed by some as a preemptive strike against emerging broadband cable services, America Online will invest $1.5 billion in Hughes Electronics, the parent of both DirecTv and Hughes Network Systems (HNS) to develop interactive television and PC services.

Through the investment, the companies said they would work on expanding interactive content to be delivered on combined DirecTv and AOL TV platforms. The alliance is also viewed as accelerating subscriber growth and revenue per subscriber for Hughes' DirecTv television service, and potentially, the satellite-based broadband Internet-access system offered through the HNS DirecPC platform.

Last month, HNS announced that it was building a set-top box capable of receiving DirecTv entertainment service and the new interactive TV service, called AOL TV. At that time, it was revealed that the device would allow the AOL service to enhance TV programming delivered via the DirecTv receiver.

Industry observers said the investment was a hedge against the threat of digital services being rolled out now by cable TV operators. DirecTv is in direct competition with cable video services, while AOL has been blocked in attempts to put its service on broadband cable platforms.

In most cases, cable operators are offering competitive services such as @Home and Roadrunner as cable-based Internet-access providers.

"There is one main reason for this alliance, the threat from cable," said David Mercer, Strategy Analytics senior analyst. "DirecTv stands to lose digital TV customers, while AOL could lose to cable's broadband Internet services. Together, they stand a good chance of seeing off the challenge"

Mercer noted that DirecTv and AOL together represent 24 million subscriptions to premium interactive and entertainment services worldwide, and both are market-share leaders in their fields.

"The challenge now for both operators is to merge their respective services into a uniquely powerful and compelling range of content which enhances customer loyalty and generates increased revenues, both through subscription fees, e-commerce and marketing" the analyst said.

But AOL stated publicly that its decision was merely a means of getting its service on all forms of Internet-access systems.

AOL chairman Steve Case said his service will continue to seek to have its service added to broadband cable platforms, and he urged that all emerging broadband pathways be made open and non-discriminatory to service providers.

The companies plan to offer the forthcoming AOL TV package to both DirecTv's 7 million satellite homes and the 6 million AOL/CompuServe PC households. Additionally, the system will be distributed to DirecTv's retail distribution network.

Hughes Network Systems, meanwhile, will both make and market the DirecTv/AOL TV receivers and said it will develop its own DirecPC high-speed satellite Internet network to incorporate a new AOL-Plus high-speed service by early 2000.

AOL had previously announced plans to develop AOL-Plus for Digital Subscriber Line (DSL) systems from Bell Atlantic and SBC Communications.

In a related announcement, HNS said it would use powerful microprocessors and other technologies from Intel to drive the DirecTv/AOL TV interactive set-top boxes planned for early 2000. Intel also said it would license DirecPC technology from HNS for future products.

A spokesman for Thomson Consumer Electronics, the leading manufacturer of DirecTv receivers, said it has no current plans to announce an AOL TV-enabled receiver, adding that Thomson "would have to turn around and make our own deal" with AOL to do so. The company might opt to work with another service provider altogether for an interactive DirecTv system, the spokesman said, but he could offer no other details.